MASTER 

NEGATIVE 
NO.  94-821 07 


COPYRIGHT  STATEMENT 


The  copyright  law  of  the  United  States  (Title  17,  United  States  Code) 
governs  the  making  of  photocopies  or  other  reproductions  of  copyrighted 
materials  Including  foreign  works  under  certain  conditions.  In  addition, 
the  United  States  extends  protection  to  foreign  works  by  means  of 
various  international  conventions,  bilateral  agreements,  and 
proclamations. 

Under  certain  conditions  specified  In  the  law,  libraries  and  archives  are 
authorized  to  furnish  a  photocopy  or  other  reproduction.  One  of  these 
specified  conditions  is  that  the  photocopy  or  reproduction  Is  not  to  be 
"used  for  any  purpose  other  than  private  study,  scholarship,  or  research." 
If  a  user  makes  a  request  for,  or  later  uses,  a  photocopy  or  reproduction 
for  purposes  in  excess  of  "fair  use,"  that  user  may  be  liable  for  copyright 
infringement. 

The  Columbia  University  Libraries  reserve  the  right  to  refuse  to  accept  a 
copying  order  if,  in  its  judgement,  fulfillment  of  the  order  would  Involve 
violation  of  the  copyright  law. 


Author: 

U.S.  Interstate  commerce 
commission 

Title: 

Federal  valuation  of  the 
railroads  in  the... 

Place: 

Philadelphia 

Date: 


[1915] 


MASTER   NEGATIVE   « 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


Business 

D530.7 

Un3435 


U.  S«     Interstate  commerce  comnlsslon* 

Federal  valuation  of  the  railroads  in  the 
United  States;   synopsis  of  statement  filed 
vith  the  Interstate  commerce  commission  by  the 
Presidents*  Conference  committee  preparatory 
to  oral  argxxment  before  the  Coinnisslon  on  Sept# 
30  and  Oct*  1  and  2,  1915.     Philadelphia 
c 1915a 
41  p. 


1.  Railroads  ^ 


U,  S.   -  Valuation* 


I 


RESTRICTIONS  ON  USE: 


TECHNICAL  MICROFORM  DATA 


RLM  SIZE: 


S5 


mA^ 


REDUCTION  RATIO: 


\2 


IMAGE  PLACEMENT:  lA     ^    IB     IIB 


DATE  HLMED: 


^\^  1^^ 


INITIALS: 


WW 


TRACKING  «  : 


M5H   0/3'f</ 


FILMED  BY  PRESERVATION  RESOURCES,  BETHLEHEM.  PA. 


CD 
O 
O 

m 

o 

X 


JO 


45^ 

■HHjl 
— — ■ 

3 


> 

o  m 
Q."n 


OQ 


CO  — ^ 


P'cn 


X 

N 


X 


M 


^ 


^e 


a? 


a^ 


''^    "* 

^•^r^ 


^>^^^ 


Ul 

o 

3 
3 


v^,>. 


> 

Ul 


S 

3 
3 


10 
O1 


o 


r^isPEu^U 


n 


hO 


K> 
00 


o 


00 


O 


1.0  mm 


1.5  mm 


2.0  mm 


ABCDEFGHIJKLMNOPORSTUVWXYZ 
abcdetgtii|klmnopqrstuvwicy;l234  567890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 
abcdefghijklmnopqrstuvwxyzl234567890 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghiiklmnopqrstuvwxyz 

1234567890 


2.5  mm 


ABCDEFGHIJKLMNOPQRSTUVWXYZ 

abcdefghijklmnopqrstuvwxyz 

1234567890 


^\}> 


V 


i^ 


Ik' 


:^' 


^ 


^p 


fcP 


^f^ 


fa> 


m 


O 

O 
■o  m  -o 

>  C  Ci> 
I  Tl  ^ 

0(/)      5 

m 

O 

m 


^ 


i? 


>-» 

r\> 

Ul 

0 

= 

3 

- 

3 

0) 

cr 

ABCDE 
cdefghi 

Sim 

IS 

FGH 

jkIm 

HIJKLMN 
Tinopqrst 

IJKLMN 
nopqrst 

OPQRSl 
uvwxyzl 

OPQR 
uvwxy 

i\»c 

N  C/) 

'-'—I 

o»< 

Ca>^ 

8 

a»x 

00 IM 

o 


'^. 


^r^. 


'^. 


THE  UBRARIES 


Graduate 
SCHOOL  OF  BUSINESS 
Library 


^lattmmm 


* 


} 


FEDERAL  VALUATION 


OF 


THE  RAILROADS 

^— — — -  ■■  "    •"  ■"  '■  ■ 

IN  THE  UNITED  STATES 


Synopsis  of  Statement  filed  with  the  Interstate 
Commerce  Commission  by  the  Presidents'  Con- 
ference Committee  preparatory  to  oral  argument 
before  the  Commission  on  September  30  and 
October  1  and  2,  1915. 


*    «  • 


•       9 


"  '     *   '   , 
Copies  may  5b« /jtt^iiied  "f fcnn  •"•••'.:•,••'     • 

''''  '   ••   'THOMAS  W=.  SiVm^,  General  Secretary 

.   ^'^■^7  Comrrerrial  Trust  Bldg.. 

Philadelphia.  Pa. 


»  »•   t 


I  • 
•     » 
t   «  ' 


a  I    • 

«  L 


L    .  «#. 


•  t 

* 


^ 

^ 


to 

CO 


to 


INTRODUCTION. 

The    railroads    in    the    United    States    comprise 
approximately  250,000  miles  of  line  and  with  double 
tracks,  yards  and  sidings  376,000  miles  of  track. 
The  Presidents'  Conference  Committee  represents 
214,704  miles  of  railroads,  approximately  86  per 
cent,  of  the  raihoad  mileage  in  the  United  States. 
The    capital    securities    of    these    companies    out- 
standing in  the  hands  of  the  pubUc  on  June  30, 
1913,   approximated  $15,330,000,000,   divided  into 
about  60  per  cent,  of  bonds  or  other  forms  of  in- 
debtedness and  40  per  cent,   of  stock,  the  latter 
owned  by  over  six  hundred  and  twenty  thousand 
stockholders.     Probably  over  10  per  cent,  of  these 
securities   are   held   by   insurance   companies   and 
savings  banks.     Insurance  companies  have  thirty- 
four  millions  of  poUcies  outstanding  and  the  sav- 
ings banks  have  ten  million  seven  hundred  thousand 
depositors.     During  the  year  ending  June  30,  1914, 
the  operating  revenues  of  the  raikoads  amounted 
to  over  three  billion  one  hundred  and  twenty-five 
millions    of   dollars;     their   expenses   of   operation 
to  over  two  biUions  of  dollars  and  their  net  oper- 
ating income   to  over  eight   hundred  millions   of 
dollars.     The  number  of  employees  for  the  year 
ending   June    30,   1913,   was    1,815,239   and   their 

1 


^. 


/ 


) 


compensation  aggregated  $1,373,000,000.  These 
carriers  paid  in  taxes  for  the  same  period  over  one 
hundred  and  twenty  millions  of  dollars. 

This  is  the  transportation  plant,  the  value  of  the 
constituent  parts  of  which  the  Commission  is 
required  to  ascertain  and  report.  The  Act  requires 
the  Carriers  to  co-operate  with  and  aid  the  Com- 
mission in  the  valuation  of  their  properties  and  the 
Carriers  have  appointed  engineering,  land  and 
accoimting  committees  who  since  the  passage  of 
the  Act  have  been  in  constant  conference  with 
Director  Prouty  and  the  Division  of  Valuation 
as  to  many  of  the  details  involved  in  making  the 
valuation.  Co-operation  is  essential  to  the  efficient 
performance  of  the  work  and  the  Carriers  urge 
that  such  co-operation  be  continued  and  enlarged 
so  that  the  Commission  may  secure  all  the  facts 
necessary  to  the  accomplishment  of  the  task  of 
valuation.  Particularly  the  Carriers  urge  the  Com- 
mission to  avail  itself  of  the  information  contained 
in  the  records  of  the  Carriers  and  suggest  that  in 
such  matters  as  the  ascertainment  of  land  values 
particularly  that  a  proper  determination  thereof 
is  impossible  in  the  absence  of  full  knowledge  of  the 
carriers '  claims.  The  Carriers  also  suggest  that  the 
detailed  work  of  the  valuation  and  the  collection 
of  the  necessary  data  therefor  depends  upon  the 
substantive  principles  of  law  under  which  the  val- 
uation must  be  made.  The  Carriers  believe  the 
time  is  near  at  hand  when  these  principles  should 

2 


be  declared  by  the  Commission  for  the  guidance 
of   the   Government   field   parties. 

It  is  impossible  at  one  time  and  hearing  to  discuss 
all  the  questions  involved  in  the  valuation.  As 
further  questions  arise  the  Carriers  will  apply  to  the 
Commission  for  permission  to  discuss  the  same  by 
argument  and  brief.  The  questions  now  considered 
correspond  in  many  respect  to  those  discussed  at 
the  public  hearing  before  the  Director  and  the 
Division  of  Valuation  and  are  generally  confined 
to  the  preparation  of  the  inventory  and  the  ascer- 
tainment of  the  three  cost  figures  prescribed  by  the 
Valuation  Act.    These  questions  follow:— 

I.   The  reasons  for  the  enactment  of  the  Valua- 
tion Act  of  March  1st,  1913. 

II.  Cost  of  reproduction  new. 

III.  Th^  determination  of  unit  prices. 

IV.  Appreciation  and  depreciation. 
V.  Land. 

VI.   The  meaning  of  the  phrase  ''owned  or  used 
for  the  purposes  of  a  common  carrier." 

VII.  The  Act  requires  a  valuation  of  aU  the  prop- 
erty owned  or  used  by  each  carrier,  in- 
cluding therein  property  the  cost  of  which 
was  charged  to  expenses  or  surplus. 
VIII.   The  other  values  and  elements  of  value. 
IX.  The  form  of  the  valuation  reports. 

3 


I. 

THE  REASONS  FOR  THE  ENACTMENT  OF 
THE  VALUATION  ACT  OF  MARCH  1st,  1913. 

The  Interstate  Commerce  Commission  first  dis- 
cussed the  question  of  valuation  of  raih-oad  property 
in  its  Second  Annual  Report  in  1888  and  from 
1903  down  to  the  time  of  the  passage  of  the  Valua- 
tion Act  the  Commission  in  its  Annual  Reports  to 
Congress  repeatedly  urged  the  passage  of  such  legis- 
lation. It  appears  from  the  various  recommendations 
made  by  the  Commission  m  its  Reports  to  Congress 
and  which  doubtless  were  the  controlling  force  in 
securing  the  enactment  of  the  legislation  that  the 
valuation  was  essential: — 

(a)  To  obtain  a  trustworthy  estimate  of  the  re- 
lation existing  between  the  present  worth  of  rail- 
road property  and  its  cost  to  its  proprietors. 

(6)  In  determining  whether  rates  as  fixed  by  the 
Government  are  confiscatory. 

(c)  In  connection  with  railway  taxation. 

(d)  In  the  ascertainment  of  a  proper  depreciation 
reserve. 

(e)  In  testmg  the  accuracy  of  the  balance  sheets 
of  the  carriers. 

CO  To  the  organization  of  railway  statistics  in 
general. 

(g)  In  determining  whether  the  railroads  are  under 
or  over-capitalized. 

4 


i 


1 


The  Railroads  Securities  Commission  in  its  Re- 
port to  the  President  also  advocated  the  valuation 
of  railroad  property. 

The  reports  of  the  Senate  and  House  Committees 
and  the  debates  in  both  Houses  show  that  the  recom- 
mendations of  the  Commission  had  been  considered, 
and  the  existence  of  a  purpose  that  the  valuation 
might  be  used  in  connection  with  rates,  capitaUza- 
tion,  taxation  and  the  regulation  of  the  issuance  of 
securities.      These    debates   and   reports    establish 
that  the  Act  requires  the  Commission  not  only  to  find 
final  value  but  to  ascertain  and  classify  every  element 
of  value  so  that  in  every  case  that  can  subsequently 
arise  all  questions  with  respect  to  final  value  may 
be  determined  by  the  Courts.     The  valuation  bill 
originally  provided  for  a  physical  valuation  but  this 
and  every  other  limitation  was  removed.    As  finally 
passed  the  bill  requires  the  ascertainment  of  all 
values  and  elements  of  value  existing  in  raihoad 
property  irrespective  of  how  the  property  was  ac- 
quired or  why  the  value  arose.     The  original  cost 
to  date;    cost  of  reproduction  new;    cost  of  repro- 
duction less  depreciation  and  every  other  value  and 
element  of  value  is  to  be  ascertained  and  reported; 
every  element  of  value  which  can  possibly  be  con^ 
sidered  by  a  Court  in  determining  the  question  of 
fair  valuation  is  required  by  the  Act  to  be  reported. 


J- 


»■ 


II. 

COST  OF  REPRODUCTION  NEW. 

The  determination  of  cost  of  reproduction  new 
involves  the  ascertainment  of  the  cost  of  repro- 
duction of  the  separate  units  of  raih-oad  property* 
the  overhead  charges  which  arise  in  the  construction 
of  a  raikoad;  and  the  cost  of  materials  on  hand  and 
working  capital. 

In  determining  the  cost  of  reproduction  new  ref- 
erence shall  be  had  to  the  conditions  as  they  exist  at 
valuation  date,  but  the  historical  construction  of 
the  property  must  be  taken  mto  consideration 
wheneyer  a  rational  engineering  program  for  re- 
production would  so  warrant  or  require.  Condi- 
tions existing  on  the  valuation  date  as  to  popula- 
tion, business  capacity,  and  productiveness  and 
property  values  in  the  territory  served  by  the  car- 
rier are  to  be  taken.  The  same  quantities  and 
classes  of  grading  materials  which  were  originally 
obtained  on  the  right  of  way  will  be  deemed  to  be 
obtainable  in  the  same  places,  and  the  present  cost 
of  moving  the  same  will  be  ascertained.  The  cost 
of  acquiring  other  necessary  materials  from  the 
most  available  sources  on  valuation  date  will  be 
ascertained. 

Knowledge  of  original  construction  will  aid  in 
the  ascertainment  of  cost  of  reproduction  under 
present  conditions.  A  rational  engineering  pro- 
gram for  reproduction  should  be  used  as  the  basis 


for  the  estimate  and  it  is  to  be  expected  that  ordi- 
narily the  representatives  of  the  carrier  will  be 
able  to  agree  with  the  representatives  of  the  Com- 
mission upon  a  proper  engineering  program  for  such 
reproduction.  The  property  of  the  carrier  to  be 
reproduced  is  to  be  considered  as  non-existent. 
The  general  conditions  outside  of  the  right  of  way 
and  terminal  lands  of  the  carrier  shall  be  considered 
to  be  as  of  date  of  valuation.  The  cost  of  repro- 
ducing all  the  maps,  profiles,  records,  etc.,  of  each 
carrier  including  the  cost  of  obtaining  information 
must  be  included  in  the  cost  of  reproduction.  The 
cost  of  acquiring  the  necessary  materials  from  the 
most  available  source  as  of  valuation  date  will  be 
taken. 


Ascertainment  of  Grading  Quantitie  . 
In  the  ascertainment  of  grading  quantities  to  be 
included  in  the  reproduction  inventory  yardage  and 
classification  must  be  specified.     In  determining  the 
quantities  for  the  ascertainment  of  cost  of  reproduc- 
tion new,  all  of  the  yardage  that  has  been  moved  to 
make  the  roadbed  as  it  now  exists  should  be  in- 
cluded.    The  original  records  of  the  carrier  when 
corroborated   furnish   better   evidence    of   grading 
quantities  than  present  measurements.     Shrinkage 
and  subsidence  must  be  ascertained  and  allowed 
for.     The  Commission  should  ascertain  as  nearly  as 
possible   the    grading   quantities   that   have   been 
actually  moved  and  placed  in  existing  lines,  and 
where  these  quantities  are  determined  by  re-measure- 

7 


ment  it  will  be  necessary  to  make  allowance  for 
shrinkage  and  subsidence  to  arrive  at  the  quantities 
actually  moved  and  placed. 

Time    Required  to  Reproduce  the  Property. 

It  is  necessary  to  determine  the  length  of  time 
that  would  be  required  to  carry  out  a  complete  pro- 
gram for  reproduction  because  time  directly  aflfects 
the  amount  of  some  large  items  of  cost  such  as  in- 
terest during  construction,  taxes,  insurance,  unit 
prices,  etc.,  etc.  No  general  rule  can  be  apphed. 
Each  case  should  receive  the  same  thorough  atten- 
tion as  if  the  properties  under  valuation  were  in 
■fact  non-existent  and  about  to  be  developed.  Con- 
sideration should  be  given  to  location,  mileage,  char- 
acter of  construction,  terminals,  supply  of  labor  and 
materials,  and  means  of  transportation.  The  time 
required  for  construction  should  be  determined  by 
considering  the  property  of  the  carrier  as  a  whole 
rather  than  upon  the  basis  of  the  reproduction  of 
each  of  its  component  parts,  although  construction 
may  progress  at  several  points  at  the  same  time. 

The  time  allowed  should  be  sufficient  for  the 
completion  and  putting  in  place  of  all  of  the  phy- 
sical parts  of  the  railroad,  and  a  proper  co-ordi- 
nation of  the  material  elements  thereof. 

The  actual  experience  of  the  carriers  will  furnish 
a  good  basis  for  the  determination  of  the  engineer- 
ing program  and  the  length  of  time  required  for 

construction. 

8 


Clearing  and  Grubbing. 

This  is  a  part  of  the  necessary  grading  of  a  rail- 
road. The  cost  of  clearing  and  grubbing  is  a  part 
of  the  grading  cost.  An  allowance  must  be  made 
therefor  in  all  cases  where  it  actually  occurred 
even  though  the  road  runs  through  what  is  now 
tillage  land. 

Topographical    and     Geological     Conditions. 

In  considering  the  structural  features  of  repro- 
duction, the  geological  and  topographical  condi- 
tions should  be  assumed  to  be  as  of  the  time  of  the 
original  construction,  except  where  they  have  sub- 
sequently been  altered  over  areas  entailing  con- 
siderable additional  constructional  difficulties  which 
were  met  by  the  railroad  from  time  to  time  as  they 
arose.  The  material  by  which  the  present  roadbed 
wa^  produced  in  its  present  condition  shall  be 
assumed  to  be  necessary  to  reproduce  the  same. 

Form  and  Manner  in  which   the  Road  shall 

BE  Reproduced. 

The  program  to  be  assumed  for  reproduction 
now  should  take  into  consideration  the  historical 
construction  of  the  property  as  far  as  necessary 
to  obtain  a  consideration  of  all  the  relevant  facts 
mvolved  m  a  fan-  reproduction  of  the  property. 
The  work  will  be  done  under  present  day  methods 

9 


of  construction  best  adapted  to  the  territory  where 
the  railroad  to  be  reproduced  is  located.  The 
method  of  handling  the  various  construction  fea- 
tures will  be  established  appropriately  to  the  con- 
ditions as  each  carrier  is  valued.  Thus,  it  must  be 
assumed  that  excavation  and  embankment  are 
made  by  one  or  another  of  the  various  methods 
employed  in  railroad  building,  such  as  team  work, 
hand  labor,  steam  shovel,  hydraulic  pump,  scraper 
work,  or  other  suitable  means.  Excavated  mater- 
ials are  generally  either  wasted,  or  placed  in  roadbed 
and  the  haul  ascertained,  gravel  and  other  materials 
are  to  be  obtained  from  the  most  economically 
available  sources,  quality  and  other  conditions 
considered,  and  not  necessarily  from  the  source 
of  origmal  construction. 

Overhead  Charges. 

The  reproduction  inventory  should  include  spe- 
cific findings  as  to  overhead  charges,  such  as  or- 
ganization expenses,  commissions,  financing,  ad- 
ministration, legal,  engineering,  interest  during  con- 
struction, taxes,  liability  and  other  insurance,  con- 
tingencies including  ommissions,  losses,  increased 
cost  due  to  accidents,  personal  injuries,  fires,  storms, 
strikes,  etc.,  etc. 

The  cost  of  the  various  physical  items  composing 
the  railroad,  when  added  together,  will  not  represent 
the  cost  of  a  completed  railroad,  for  expenses  of 
the  above  kinds  enter  into  the  construction  cost  of 
every   railroad,  and  appropriate  amounts  therefor 

10 


must  be  included  in  the  cost  of  reproduction  new. 
The  propriety  of  their  allowance  in  the  cost  of 
reproduction  new  is  generally  affirmed  by  the 
Reports  of  Commissions  and  the  Decisions  of  the 
Courts. 

Engineering. 
The  cost  of  engineering  is  not  uniform.  It  varies 
with  the  quality  and  quantity  of  the  work.  The 
character  of  the  country,  topography,  geology  and 
density  of  population,  as  well  as  the  extent  of  con- 
struction, all  affect  the  relation  or  ratio  of  engineer- 
ing expense.  Valuation  practice  is  not  settled  as 
to  the  amount  or  method  of  arriving  at  the  allowance 
for  engineering.  The  records  of  the  Carriers  under 
consideration  should  be  carefully  examined  and  in  the 
absence  of  records  an  estimate  should  be  made  with 
a  minimum  allowance  of  5  per  cent,  for  road,  2  per 
cent,  for  equipment  and  63/^  per  cent,  for  con- 
struction requiring  costly  engineering  work  such  as 
large  terminals  in  large  cities. 

Contingencies. 
Strictly  speaking,  contingencies  is  not  an  overhead 
cost.  It  is  a  construction  cost  and  belongs  in  the 
body  of  the  inventory  and  wherever  possible  it 
should  be  assigned  to  the  appropriate  accoimts. 
This,  however,  is  not  possible  in  all  cases,  and  the 
item  of  contingencies  is  usually  considered  an  over- 
head cost  and  treated  as  such.  The  item  in- 
cludes unforeseen,  uninvestigated,  indeterminate  or 

omitted  items  of  construction  expense  and  varies 

11 


— f 


with  different  properties  and  different  parts  of  the 
same  property.  Contingencies  are  of  construction 
or  of  inventory.  It  is  more  difficult  to  make  an 
accurate  estimate  of  the  cost  of  reproduction  new 
than  the  cost  of  actual  construction  about  to  be 
undertaken. 

Interest  During  Construction. 

Interest  during  construction  period  is  a  funda- 
mental element  of  cost  and  the  amount  therefore 
must  be  ascertained  and  included  in  the  reproduc- 
tion cost  of  the  railroad.  An  appropriate  financial 
program  should  be  agreed  upon  between  the  Carrier 
and  the  Government  to  provide  money  and  materials 
as  needed.  The  capital  should  be  raised  in  advance 
to  provide  for  at  least  one  year's  work  under  the 
engineering  program.  This  is  the  customary  as  well 
as  the  most  practical  economical  method. 

Taxes. 

The  court  decisions  support  the  practice  to  in- 
clude taxes  during  construction  as  part  of  the  cost  of 
reproduction.  Taxes  vary  in  the  different  States 
and  no  uniform  rule  can  be  laid  down. 

Promotion,   Organization  and  Administration. 

These  overhead  costs  must  be  determined  by  the 
experience  of  the  Carriers.  The  early  organization 
may  be  small  but  must  increase  with  the  develop- 
ment of  the  project. 

12 


Materials  on  Hand  and  Working  Capital. 

Every  railroad  company  must  always  have  on 
hand  working  capital  in  the  form  of  cash  to  meet 
pay-rolls,  bills  and  immediate  demands;  also  to 
have  on  hand  materials,  supplies  and  other  working 
assets.  These  items  are  essential  and  are  so  recog- 
nized by  the  Decisions  of  Courts  and  Reports  of 
Commissions.  In  order  to  properly  determine  the 
cost  of  reproduction  new  proper  amounts  to  cover 
cost  of  materials  on  hand  and  working  capital  must 
be  added  to  the  cost  of  reproduction  of  the  separate 
units  in  actual  use  and  the  overhead  charges  referred 
to  heretofore. 


13 


-  ^d^iiSiiiiiiiiiiiiiii^^ 


III. 

THE  DETERMINATION  OF  UNIT  PRICES. 

The  prices  to  be  used  in  the  valuation  should 
be  arrived  at  by  a  consideration  of  prevailing 
prices,  price  tendencies  and  conditions  affecting 
labor  and  material  markets  during  a  reasonable 
period  of  time  next  preceding  and  at  the  date 
as  of  which  the  valuation  is  to  be  made,  due  con- 
sideration being  given  to  the  existence  or  non- 
existence of  active  railroad  construction  during 
that  period.  The  most  valuable  guide  for  use 
in  this  valuation  will  be  ''weighted  average''  the 
prices  of  those  commodities  which  fluctuate  violently 
in  price  and  have  no  definite  price  tendency. 

The  consideration  of  price  tendencies  is  most 
important  in  determining  a  basis  of  prices,  but  it 
will  be  more  accurate  to  determine  price  tendencies 
with  reference  to  particular  commodities  rather 
than  with  reference  to  commodities  in  general 
because  the  price  tendency  of  some  commodities 
is  upward  and  of  other  commodities  the  price 
tendency  is  downward.  Periods  of  active  railroad 
construction  coincide  with  periods  of  high  prices, 
and  periods  of  stagnation  coincide  with  periods 
of  low  prices. 

The  importance  of  the  subject  of  unit  prices  is 
so  great,  and  so  many  different  elements  enter 
into  a  proper  consideration  of  it,  some  of  which 
depend   upon   local   conditions   and   peculiar    cir- 

14 


cumstances,  that  no  prices  ought  to  be  applied 
even  tentatively,  by  the  Government  valuation 
forces  without  the  fullest  consultation  with  re- 
presentatives of  the  carrier  whose  property  is 
being  valued. 


u 


^^  ^ 


IV. 
"  APPRECIATION  AND  DEPRECIATION. 

t 

In  order  to  determine  the  cost  of , reproduction 
less  depreciation  the  amount  of  appreciation  must  be 
added  to  and  the  amount  of  depreciation  must  be 
subtracted  from  the  cost  of  reproduction  new. 

Appreciation  is  an  improvement  in  the  quality 
and  usefulness  of  the  physical  items  of  property, 
whereby  there  is  an  increase  in  the  worth  or  value  of 
such  physical  items  over  and  above  their  repro- 
duction cost  new. 

Solidification  and  seasoning  reduce  cost  of  main- 
tenance of  property  and  of  train  operation  and 
give  a  higher  value  for  use  in  the  operation  of  trains 
because  of  greater  safety  and  speed. 

Adaptation,  where  the  facts  disclosing  the  same 
are  known  or  ascertainable,  should  be  noted  and 
taken  into  account,  in  determining  the  amount  to 
be  added  to  the  cost  of  reproduction  new  on  account 
of  appreciation. 

Depreciation  is  a  lessening  of  worth  or  value  in 
use  or  for  the  purposes  of  the  use  of  physical  prop- 
erty. There  is  no  depreciation  in  a  composite 
property  when  the  deterioration  in  its  physical 
parts  is  taken  care  of  by  proper  replacements  as  due. 

The  depreciation  allowance  provided  for  in  the 
accounts  does  not  measure  the  depreciation  re- 
ferred to  in  the  Valuation  Act,  and  should  be  en- 
tirely disregarded  in  determining  such  depreciation. 

16 


The  railroad  is  new  when  construction  is  com- 
pleted and  all  of  the  physical  parts  are  properly 
co-ordinated,  but  at  this  time  the  separate  units  of  a 
raih-oad  are  not  new.  They  have  all  departed  more 
or  less  from  a  condition  of  ''newness,''  depreciation 
of  the  separate  units  must  be  measured  from  such 
condition  or  the  depreciation  of  the  separate  units 
occurring  during  construction  must  be  added  as  a 
part  of  the  cost  of  reproduction  new. 

Mere  accrued  deterioration  in  one  or  more  of 
the  physical  items  of  simple  properties  of  a  rail- 
road is  not  depreciation,  unless  thereby  the  value 
of  the  railroad  as  a  whole  is  lessened,  because  it  is 
the  value  of  the  railroad  ''in  its  entirety''  that  is 
to  be  ascertained,  and  the  criterion  is  "the  value  of 
the  system  as  completed,"  for  the  uses  and  purposes 
intended. 

The  depreciation  required  to  be  taken  into  ac- 
count in  determining  the  cost  of  reproduction  less 
depreciation  arises  only  from  use  and  age,  and  does 
not  include  that  resulting  from  obsolescence  or  inad- 
equacy. 

Deterioration  arising  from  age  and  use  is  accrued 
or  matured.  The  latter  is  known  as  deferred  main- 
tenance and  exists  where  there  is  a  failure  to  make 
proper  repairs  or  replacements  as  due.  This  is  the 
depreciation  required  by  the  Act  to  be  deducted  in 

determining  the  cost  of  reproduction  less  deprecia- 
tion. 

Accrued  deterioration  is  that  form  of  deterioration 
which  has  not  progressed  sufficiently  far  to  require 

17 


a  replacement,  and  is  not  to  be  taken  into  account 
in  determining  the  cost  of  reproduction  less  de- 
preciation. 

The  Commission  is  specifically  empowered  by 
the  Act  to  make  a  classification  of  the  elements 
that  constitute  the  ascertained  value  as  found 
by  them,  which  classification  need  not  coincide 
with  the  detail  required  in  the  inventory.  The 
meaning  of  the  phrase  "each  piece  of  property'' 
as  used  in  the  Act  is  largely  determined  by  the 
classification  adopted  by  the  Commission. 

The  tract  is  but  one  unit  of  property  devoted  to  a 
single  use,  and  in  determining  depreciation  should 
be  so  treated. 

It  is  common  knowledge  that  a  newly-constructed 
railroad  has  no  greater  length  of  life  than  an  old 
railroad  which  has  been  properly  maintained,  and  is 
not  only  of  no  greater  value  as  a  piece  of  physical 
property  than  is  the  old  railroad,  but  is  actually  of 
less  value. 

There  being  no  increase  in  value  by  reason  of  a 
newness  it  necessarily  follows  that  the  ageing  of  a 
railroad  has  nothing  to  do  with  its  value  as  a  physi- 
cal property,  other  than  to  increase  such  value  by 
appreciation. 

The  "value  of  the  property  invested''  in  a  rail- 
road is  preserved  indefinitely  by  due  and  proper 
replacements,  and,  therefore,  unless  these  replace- 
ments are  neglected,  there  is  no  depreciation  in  the 
railroad. 


18 


!f! 


The  inquiry  to  be  made  is  the  determination  of  the 
extent  to  which  repairs  and  replacements  have  been 
neglected. 

The  element  of  accrued  deterioration,  that  is,  the 
loss  of  service  life  in  the  simple  properties  of  a  rail- 
road, the  same  being  still  in  place  and  in  useful 
serviceable  condition,  should  not  be  considered  as 
an  element  of  depreciation,  because,  as  has  been 
demonstrated,  this  element  does  not  affect  the 
value  of  the  railroad  or  the  investment,  and  the 
sole  and  only  purpose  of  the  Valuation  Act  is  to 
ascertain  value. 

Accrued  deterioration  not  only  should  not  be  con- 
sidered, but  it  would  be  utterly  impossible  for  any 
man,  or  body  of  men,  no  matter  how  expert  or  con- 
scientious they  might  be,  to  fairly  determine  the 
value  of  the  railroad  by  any  such  method.  The 
expectancy  of  life  of  the  various  properties  of  a 
railroad  can  only  be  determined  by  a  guess  or  an 
estimate,  in  the  making  of  which  the  length  of 
service  already  had  of  the  property,  or  its  age,  is 
one  of  the  least  facts  to  be  considered.  Use  is  a 
far  more  important  factor  than  age  in  determining 
length  of  service  life,  and  the  extent  of  the  use 
varies  not  only  on  different  railroads  but  on  the 
same  railroad. 

It  follows  that  the  attempt  to  measure  accrued 
deterioration,  or  expectancy  of  life,  of  the  various 
properties  of  a  railroad  being  but  a  most  uncertain 
guess,  that  the  summing  up  of  thousands  of  such 
guesses  made  by  hundreds  of  different  guessers, 

19 


each  pursuing  his  own  method  of  guessing,  in  order 
to  determine  depreciation,  and  thereby  reduce 
value,  would  be  to  make  valuation  an  absurdity 
and  the  result  obtained  worthless  for  any  purpose. 
There  is  but  one  way  of  fairly  determining  the 
amount  of  such  deferred  maintenance  and  that  is 
by  personal  inspection  of  the  property  by  competent 
experts,  who  have  first  familiarized  themselves 
with  the  practice  and  policy  of  the  particular  car- 
rier in  the  maintenance  of  its  property,  and  who 
understand  the  use  required  to  be  made  of  such 
property. 

The  property  should  be  inspected  jointly  by  the 
joint  inspection  party  referred  to  and  every  reason- 
able effort  made  to  agree :  First,  upon  the  question 
whether  there  is  any  deferred  maintenance,  and 
second,  the  amount  of  it,  if  any. 

If  agreement  cannot  be  reached,  then  an  examiner 
should  be  appointed  to  take  and  report  the  evidence 
submitted  by  the  parties. 

If  the  suggestions  as  to  classification  are  fol- 
lowed there  will  be  a  proper  classification  for 
valuation  and  depreciation  purposes  of  the  prop- 
erties of  the  railroad,  in  addition  to  the  *' inven- 
tory in  detail''  of  all  of  the  property  for  listing, 
checking  and  examination  purposes.  The  classi- 
fication as  made  wiU  determine  what  is  a  *  Apiece 
of  property"  and  **cost  of  reproduction  less  de- 
preciation" is  to  be  ascertained  of  '^  these  several 
classes"  or  ** pieces"  of  property. 

It  is  deemed  proper,  however,  to  extend  tJie  dis- 

20 


cussion  so  as  to  include  methods  for  estimating 
the  expectancy  of  life  remaining  in  a  simple  prop- 
erty, for  the  reason  that  on  some  of  the  rail- 
road properties,  now  being  valued,  it  is  under- 
stood that  the  Government  field  forces  are  en- 
gaged in  estimating  such  expectancy  of  life  of 
the  simple  properties,  and  if,  despite  the  argu- 
ment here  made  the  Commission  shall  hereafter 
approve  the  making  of  such  estimates,  the  order 
of  approval,  it  seems  to  us,  should  be  accompanied 
by  such  rules  and  directions  as  will  cause  the 
estimates  made  to  approach  most  nearly  to  the 
truth. 

It  is  for  this  reason  alone  that  the  following 
additional  suggestions  are  made. 

Classification. 
For  the  purpose  of  meeting  the  suggestion  in 
the  Act  that  the  road  and  equipment  account  be 
followed  as  nearly  as  practicable,  the  property 
may  be  classified  as  follows: — 

1.  Items  and  groups  of  property  which  appre- 
ciate. 

2.  Items  for  which  cost  of  reproduction  less 
depreciation  and  the  cost  of  reproduction  new  are 
the  same. 

3.  Track. 

4.  Machinery,  tools  and  equipment. 


5.  Remaining  classes. 


21 


Life  or  Mortality  Tables. 

Any  method  for  the  ascertainment  of  depre- 
ciation which  is  based  on  tables  purporting  to 
show  the  average  life  of  the  physical  parts  of  a 
railroad  which  do  depreciate  will  lead  to  inaccu- 
rate results.  The  length  of  life  in  a  particular 
case  may  be  much  greater  or  much  less  than  the 
average  shown  in  such  tables. 

Accounting  Methods. 

Accounting  methods  used  for  the  creation  of 
depreciation  and  renewal  reserves  are  not  selected 
or  calculated  to  disclose  the  condition  of  the  prop- 
erty at  any  particular  time.  Those  methods  vary 
from  time  to  time  to  carry  out  the  financial  policy 
of  the  company. 

The  Straight  Line  Method  is  Erroneous. 

Experience  does  not  justify  the  thought  that 
depreciation  progresses  uniformly  as  time  elapses. 
Eepairs  and  replacements  are  made  necessary  in 
some  instances  by  use,  in  others  by  weather,  and 
sometimes  by  both  operating  together.  The  effect 
of  each  is  variable,  depending  upon  the  circum- 
stances, and  no  principles  have  ever  been  estab- 
lished for  the  just  measureiiaent  of  the  effect  or 
either  by  any  statistics  which  reliably  reflect  ex- 
perience. 

22 


Minimum  Condition  Per  Cent. 

Whatever  method  may  be  employed  for  the 
ascertainment  of  the  cost  of  reproduction  less 
depreciation,  a  minimum  service  condition  per 
cent,  while  in  use  should  be  established  and  the 
amoimt  of  existing  depreciation  should  be  fixed 
between  the  condition  of  the  property  before  it 
depreciated  and  such  minimum. 

Track. 

As  hereinbefore  pointed  out,  in  the  absence  of 
deferred  maintenance,  there  is  no  depreciation  in 
the  track  items. 

Machinery,  Tools  and  Equipment. 

The  depreciation,  if  any,  existing  at  the  valua- 
tion date  may  be  ascertained  in  like  manner  as 
the  depreciation  of  perishable  property  referred 
to  below. 

Eemaining  Classes. 

Property  grouped  under  this  caption  should  be 
divided  into  two  groups:  Non-perishable;  Perish- 
able. 

Non-perishable. 

Non-perishable  property  is  that  which  does  not 
depreciate  when  properly  cared  for  and  main- 
tained and  in  which  wear  and  decay  are  negligible. 
The  only  depreciation  that  can  exist  in  this  class 

23 


of  property  is  deferred  maintenance.  Stone,  con- 
crete and  brick  structures,  steel  bridges  and  struc- 
tures of  other  similar  pennanent  material  are 
illustrations  of  non-perishable  property. 

Perishable. 

Perishable  property  is  that  which  depreciates 
by  wear  and  decay  notwithstanding  proper  main- 
tenance. 


24 


V. 

LAND. 

Method  of  determination  of  present  value. 
The  present  value  of  each  piece  of  land  used  for 
transportation  purposes,  must  be  determined 
upon  the  same  principles  which  govern  in  case  of 
condemnation  of  private  property  for  public  use. 

In  the  case  of  right  of  way,  station  grounds 
and  terminals,  as  in  the  case  of  other  lands  of 
considerable  area,  the  value  of  the  whole  is 
greater  than  the  smn  of  the  values  of  the  parcels 
comprising  the  same,  and  there  are  elements,  such 
as  continuity,  shape,  suitableness  for  railroad  use, 
&c.,  which  must  be  taken  into  account  and  al- 
lowed. 

The  present  cost  of  acquisition  of  an  equally 
suitable  strip  or  tract  of  land,  in  or  through  ad- 
jacent lands  in  that  vicinity,  is  relevant  to  the 
determination  of  the  present  value  of  lands  used 
for  transportation  purposes. 

In  the  determination  of  the  '* present  value"  of 
lands  used  for  transportation  purposes,  the  same 
class  of  evidence  and  all  facts  and  information 
upon  which  experts  judge  land  values  should  be 
ascertained  and  taken  into  account,  as,  for  ex- 
ample, knowledge  of  bona  fide  sales  of  like  or 
comparable  lands  in  the  vicinity,  the  market  value 
for  general— not  including  railway— purposes  of 
similar  lands,  the  market  value  for  all  its  avail- 

25 


-i—iilFliiiiliiiiiiilif 


able — ^including  railway — uses  and  purposes,  and 
if  the  land  has  a  peculiar  value  or  special  adapta- 
tion for  railroad  purposes,  that  element  is  to  be 
allowed. 

Cost  of  Reproduction  New. 

In  the  case  of  land,  as  in  the  case  of  other 
parts  of  public  utility  properties,  it  has  long 
been  recognized  by  appraisers,  connnissioners, 
and  Courts  that,  when  reasonably  determined,  the 
present  cost  of  acqairing  the  same — if  non-exist- 
ent or  owned  by  some  one  else — ^is  a  fair  measure 
of  present  value,  and  is  the  cost  of  reproduction. 

The  Valuation  Act  by  paragraph  ** First,"  and 
also  by  paragraph  ''Second,"  requires  the  Com- 
mission to  ascertain  and  report  the  cost  of  re- 
production of  each  piece  of  right  of  way  and  ter- 
minal lands. 

Paragraph  ''Second"  requires  the  separate 
ascertainment  of  tho  elements  involved  in  the  cost 
of  reproduction  of  lands,  rights  of  way  and  ter- 
minals, in  order  that  such  elements  may  be  com- 
pared with  the  corresponding  elements  included  in 
total  original  cost,  which  is  also  by  that  paragraph 
required  to  be  reported. 

There  are  many  instances  where  the  reproduc- 
tion method  has  been  employed  by  the  Courts, 
commissions,  and  appraisers,  in  the  ascertain- 
ment of  the  value  of  public  utility  properties,  in- 
cluding land. 

26 


The  Minnesota  Rate  Cases. 


V 


The  Minnesota  Cases  do  not  condemn  the  re- 
production method  of  valuing  land,  when  reason- 
ably applied.  The  Court  condemned  the  particu- 
lar method  used  in  the  Northern  Pacific  Case,  be- 
cause of  defects  it  found  therein  and  which  are 
specified  in  the  opinion. 

The  phrase  "fair  average  of  the  normal  market 
value  of  land  in  the  vicinity  having  a  similar 
character,"  and  the  phrase  "the  fair  average 
market  value  of  similar  land  in  the  vicinity,  with- 
out additions  by  the  use  of  multipliers,  or  other- 
wise, to  cover  hypothetical  outlays,"  are  not  to 
be  read  to  mean  market  value  for  general — ^not 
including  railway — purposes.  To  so  read,  either 
of  them  would  directly  conflict  with  the  principles 
stated  or  recognized  in  the  opinion.  These  phrases 
mean  the  prices  which  the  company  would  now 
have  to  pay,  to  carve  an  equivalent  right  of  way 
out  of  adjacent  lands  having  a  similar  character 
and  value.  Later  decisions  of  the  Supreme  Court 
(San  Joaquin  Water  Rate  Case,  233  U.  S.,  454, 
and  the  Des  Moines  Gas  Rate  Case,  decided  June, 
1915),  are  inconsistent  with  the  claim  that  the 
value  of  the  right  of  way  and  terminal  lands  of  a 
railroad  company — when  shown  to  be  more — is  to 
be  limited  to  the  market  value  for  general,  not  in- 
cluding railroad,  purposes  of  land  in  the  vicinity 
having  a  similar  character.  There  is  not  support 
in  the  decisions  of  the  Court,  for  their  claim,  that 

27 


the  present  cost  of  acquisition  of  the  same  or 
equivalent  lands  does  not — ^when  reasonably  ascer- 
tained— constitute  good  evidence  of  the  present 
value  of  those  lands. 

CLASSIFICATIOlSr  OF  LaNDS. 

Lands  actually  used  for  common  carrier  pur- 
poses shall  be  valued  as  such  irrespective  of 
whether  owned  or  not.  Lands  owned  and  held  for 
future  common  carrier  purposes,  in  anticipation 
of  reasonable  need  therefor,  shall  be  valued  as 
common  carrier  lands  irrespective  of  whether  now 
actually  used  or  not.  Lands  owned  and  held  for 
purposes  other  than  those  of  a  common  carrier 
shall  be  valued  under  paragraph  Third  of  the  Act. 

Lands  are  dedicated  to  public  use  within  the 
meaning  of  this  Act  when  originally  acquired  for 
the  purposes  of  a  common  carrier  by  the  present 
or  any  predecessor  common  carrier,  but  where  the 
lands  were  acquired  for  other  than  the  purposes 
of  a  common  carrier  the  time  of  dedication  to  pub- 
lic use  shall  be  taken  to  be  the  time  when  the  in- 
tention was  formed  to  hold  the  lands  for  common 
carrier  purposes. 


28 


J 


iv^ 


"I  "I 


I    % 


f 


\ 


VI. 

THE  MEANING  OF  THE  PHRASE  "OWNED 
OR  USED  FOR  THE  PURPOSES  OF  A 
COMMON  CARRIER." 

The  expressed  language  of  the  Valuation  Act, 
as  well  as  the  decisions  of  the  Courts,  require  a  re- 
port of  the  value  of  all  property,  either  owned 
or  used,  by  every  common  carrier.  All  physical 
property  so  used,  whether  owned  or  not,  by  every 
common  carrier,  must  be  included  in  its  inventory 
of  property  owned  or  used  for  common  carrier 
purposes. 

All  physical  property  in  use  by  the  operating 
carrier  should  be  included  in  its  inventory,  and  if 
it  is  owned  or  used  by  any  other  carrier  or  car- 
riers it  should  also  be  included  in  the  inventories 
of  each  of  such  carriers  or  incorporated  therein  by 
reference.  A  full  statement  of  the  ownership  and 
use  of  the  property  and  the  rights  of  the  respec- 
tive carriers  with  reference  thereto  should  accom- 
pany each  inventory  where  the  property  is  in- 
cluded. 

The  value  of  all  joint  facilities  tracks  or  other 
property  jointly  used,  to  each  carrier  having  any 
title  thereto,  or  right  to  the  use  thereof  coupled 
with  such  use,  must  be  determined  and  included 
in  the  valuation  of  the  carrier's  property  required 
to  be  ascertained  and  reported. 

29 


Before  the  value  of  a  joint  facility  to  a  particu- 
lar carrier  can  be  determined,  all  the  facts  in  con- 
nection with  its  ownership  and  use  must  be  de- 
termined in  addition  to  the  original  cost,  cost  of 
reproduction  new,  and  cost  of  reproduction  less 
depreciation  of  the  physical  parts. 

The  different  situations  presented  seem,  from 
a  preliminary  examination  to  be  almost  unlimited, 
and  the  examples  which  follow  are  by  no  means 
complete.  They  will  serve  for  the  purpose  of  the 
present  discussion. 

Facilities  affected  by  joint  interests  are  inter- 
locking plants;  terminals  and  stations  jointly 
owned  or  used;  tracks  jointly  owned  or  used,  in- 
cluding side  tracks  and  industrial  tracks;  tele- 
graph facilities  jointly  owned  or  used;  trackage 
rights  and  leased  lines ;  private  freight  cars ;  &c. 

If  facilities  are  being  used  by  several  carriers 
and  meeting  the  requirements  of  each,  it  is  an  im- 
portant fact  to  be  brought  out  in  this  valuation, 
and  it  will  be  impossible  to  determine  the  value 
of  different  carriers  of  property  jointly  used  until 
all  the  facts  of  user  are  fully  known,  as  well  as 
the  so-called  cost  values  thereof. 

The  rules  by  which  the  value  to  particular  car- 
riers of  these  facilities  shall  be  determined  can- 
not be  properly  worked  out  until  the  facts  are 
understood,  and  it  is  essential  to  determine  all 
the  facts  fully  with  reference  to  all  property 
either  owned  or  used  by  every  carrier  to  be 
valued  in  this  proceeding,  before  attempting  to 


<<  1 


0 


allot  the  value  to  any  particular  carrier  of  any 
property  affected  by  a  joint  interest.  When  all 
these  facts  are  properly  before  the  Commission, 
then  will  be  the  time  to  formulate  the  rules  for 
the  determination  and  apportionment  of  such 
value. 


30 


31 


nl*r^ 


p 


VII. 

THE  ACT  REQUIRES  A  VALUATION  OF 
ALL  THE  PROPERTY  OWNED  OR  USED 
BY  EACH  CARRIER  INCLUDING 
THEREIN  PROPERTY,  THE  COST  OP 
WHICH  WAS  CHARGED  TO  EXPENSES 
OR  SURPLUS. 

The  principles  of  law  affecting  this  question 
may  be  summarized  as  follows: — 

(a)  The  express  language  of  the  Valuation  Act 
requires  the  inclusion  of  all  the  property  owned 
or  used  by  the  common  carrier. 

(6)  The  value  of  the  property  of  the  carrier 
is  to  be  ascertained  upon  the  same  principles  as 
would  apply  if  the  property  were  being  con- 
demned for  a  public  use. 

(c)  The  thing  to  be  ascertained  is  the  value  of 
the  property  at  the  time  it  is  being  used  for  the 
public  service,  and  the  expressions — ^^real"  value, 
"fair"  value,  ** reasonable"  value,  ''the  present," 
value,  ''actual"  value  and  "the"  value,  are  used 
synonymously. 

(d)  The  method  of  acquisition  or  the  source  of 
the  funds  used  to  pay  for  the  property  is  im- 
material. 

(e)  Additions  and  betterments  paid  for  out  of 
earnings  and  charged  to  operating  expenses  or 
surplus  are  the  property  of  the  carrier  and  must 
be  valued  as  such. 

32 


^'#>j 


. 


X 


I 

V 


\ 


if)  No  reported  case  holds  that  additions  aud 
betterments  paid  for  out  of  earnings  should  be 
excluded. 

{g)  Rate  cases  have  decided  that  the  value  of 
additions  and  betterments  paid  for  out  of  earn- 
ings must  be  included  in  the  valuation  found  by 
the  Courts. 

(h)  The  cases  have  decided  that  appreciation 
in  land  values  is  the  property  of  the  carrier  and 
must  be  included  in  the  valuation. 

(0  In  determining  what  is  a  reasonable  return 
upon  the  property  of  the  carrier,  expenditures  for 
additions  and  betterments  should  not  be  included 
in  operating  expenses. 

(i)  The  expenditure  made  by  the  owner  is  not 
the  test  of  value. 

It  is  important  to  bear  in  mind  that  the  question 
before  the  Commission  at  the  present  time  is  not 
as  to  the  adequacy  of  the  net  operating  income  of 
a  carrier  where  expenditures,  properly  chargeable 
to  the  Road  and  Equipment  Accounts,  have  been 
charged  to  expenses.    The  question  as  to  the  ex- 
tent to  which  additions  and  betterments  should 
be  paid  for  out  of  earnings  is  one  of  railway 
economics  and  is  a  quite  distinct  question  from 
that  now  before  the  Commission.    The  question, 
and  the  sole  question  now  for  consideration  by  the 
Commission  is,  the  ascertainment  of  "the  value 
of  all  the  property  owned  or  used"  by  every  com- 
mon carrier. 

» 

33 


•  T 


That  additions  and  betterments  paid  for  out  of 
earnings  or  surplus  are  just  as  much  a  part  of  the 
investment  of  the  carrier  as  if  paid  for  out  of 
capital  is  recognized  by  the  accoimting  regulations 
of  the  Commission  with  respect  to  the  Road  and 
Equipment  Classification  (effective  on  July  1st, 
1914),  which  regulations  require  that  such  expen- 
ditures shall  be  charged  to  this  account,  and  which 
account  is  defined  by  the  General  Instructions  as 
"designed  to  show  the  investment  of  the  carrier 
in  property  devoted  to  the  transportation  service." 

The  suggestion  that  additions  and  betterments 
paid  for  out  of  earnings  or  surplus  are  not  to  be 
included  in  the  property  of  the  carrier  upon  which 
the  return  is  to  be  calculated,  is  one  directly  con- 
trary to  the  public  interest.    It  means: — 

1.  The  issue  of  new  capital  for  all  additions 
and  betterments  irrespective  of  whether  they  are 
presently,  actually,  or  relatively  remunerative,  thus 
necessarily  producing  over-capitalization  in  point 
of  fact,  though  not  in  point  of  law ; 

2.  The  deferring  of  expenditures  for  additions 
and  betterments,  with  their  consequent  increased 
cost,  interference  with  traffic,  and  injury  to  com- 
merce ; 

3.  A  lessening  of  the  protection  of  the  car- 
rier during  periods  of  commercial  or  financial 
depression ; 


•v»» 


i 


\ 


. 


4.  A  weakening  of  the  credit  of  the  carriers, 
with  the  consequent  increased  cost  of  securing 
new  capital; 

5.  A  rate  of  dividend  varjdng  from  year  to 
year,  thus  giving  a  speculative  tendency  to 
railroad  securities; 

6.  A  diminution  of  efficiency  in  operation  be- 
cause of  the  attempt  to  force  the  adjustment  of 
more  or  less  inflexible  operating  expenses  to  fluctu- 
ation in  business; 

7.  A  reversal  of  the  practice  followed  by  all 
well-managed  private  concerns,  where  a  reserve  is 
invariably  maintained; 

8.  That  the  rates  of  the  future  must  be  high 
enough  to  reimburse  the  stockholder  for  the  defi- 
ciencies of  the  past. 


35 


VIII. 

THE  OTHER  VALUES  AND  ELEMENTS 

OF  VALUE. 

The  intangible 'values  axe  a  part  of  the  present 
value  of  the  carriers'  property  and  must  be  ascer- 
tained and  reported. 

The  classification  of  other  values  and  elements 
of  value.  The  other  values  and  elements  of  value 
included  in  the  Valuation  Act  group  themselves 
into  two  classes: — 

(a)  Values  which  attach  to  specific  pieces  of 
property  or  units  or  parts  of  the  property. 

(6)  Values  which  attach  to  the  property  as  a 
whole. 

Values  which  attach  to  specific  pieces  of  property 
or  parts  of.  the  property  cannot  be  valued  to- 
gether, and  must  be  valued  separately.  Any  value 
which  attaches  to  any  particular  item  of  physi- 
cal property  in  addition  to  the  value  arising  be- 
cause of  its  "cost,"  must  be  so  valued. 

If  the  carrier  owns  a  piece  of  right  of  way  or 

terminal  which  renders  all  the  service  which  the 
owning  carrier  can  require  therefrom,  and  in 
addition  thereto  the  carrier  receives  a  substantial 
revenue  therefor  from  some  other  carrier,  this 
value  should  be  measured  here. 

Values  which  attach  to  the  property  as  a  whole 
can  be  valued  together.    Among  such  values  are: — 

1.  Value  of  unity  of  use  and  connected  operation. 

36 


^.  l7 


i 


\ 


2.  Going  concern  value. 

3.  Location  value — traffic. 

4.  Location  value — operation. 

5.  Franchise  value. 

Value  of  unity  of  use  and  connected  operation 
is  that  element  of  value  which  results  whenever 
the  separate  articles  of  physical  property  consti- 
tuting a  railroad  are  joined  together,  not  simply 
by  a  unity  of  ownership,  but  in  a  unity  of  use. 

Going  concern  value  is  that  element  of  value, 
in  addition  to  the  sum  of  the  values  of  its  component 
parts,  which  results  from  the  act  that  the  plant  is 
is  operation  and  has  an  established  business,  i,  e., 
in  active  and  successful  operation  earning  revenue. 

Location  value  with  reference  to  traffic  is  that 
element  of  value  which  represents  the  earning  capac- 
ity of  the  property  due  to  its  favorable  location 
with  reference  to  command  of  traffic,  including 
the  existence  of  traffic-producing  industries  along 
its  line,  its  advantage  of  connections  with  other 
carriers,  the  potential  traffic  in  its  tributary  territory 
and  all  other  features  bearing  upon  its  present  and 
prospective  traffic-earning  capacity. 

Location  value  with  reference  to  operation  is 
that  element  of  value  resulting  from  ecomony  of 
operation  due  to  gradient,  alignment  and  other 
physical  characteristics,  climatic  conditions,  ade- 
quacy of  terminals,  equipment  and  other  facilities, 
fuel  supply,  efficiency  of  operating  organization 
and  all  other  features  bearing  upon  the  cost  of  opera- 
tion and  maintenance. 

37 


I 
j 


Franchise  value  is  that  element  of  value  repre- 
sented by  franchises  and  privileges. 

Each  element  of  value  blends  into  all  the  others, 
deriving  its  value  in  connection  with  and  contributing 
value  to  the  others. 

These  factors,  and  undoubtedly  many  others  which 
have  not  been  mentioned,  all  contribute  to  the  pro- 
ductiveness of  the  use  of  its  property  by  a  carrier, 
and  although  they  attach  to  the  property  as  a  whole, 
they  have  an  identity  and  value  as  real  and  actual 
as  any  physical  part. 

We  do  not  at  this  time  make  any  suggestion's 
with  reference  to  the  measurement  of  the  other 
values  and  elements  of  value.  The  method  by  which 
these  other  values  and  elements  of  value  should  be 
measured  will  be  submitted  to  the  Commission 
at  some  later  time. 


38 


^t* 


IX. 

THE    FORM    OF    THE   VALUATION 

REPORTS. 

The    Form    of    the    Report    to    Congress    by 

THE  Commission. 

The  Commission  is  required  to  embody  in  this 
report  ''final  value,"  with  an  inventory  of  all  the 
property  of  the  carrier  and  the  value  thereof, 
as  well  as  with  the  details  prescribed  in  the  para- 
graphs ''First"  to  "Fifth"  inclusive.  The  Com- 
mission in  its  report  should  make  findings  of  fact 
and  law  in  such  detail,  that  a  Court  may  determine 
not  only  the  evidentiary  weight  of  the  Commis- 
sion's finding  of  "final  value,"  and  whether  the 
presumption  created  by  the  statute  has  been  over- 
come, but  also  the  principles  of  law  which  the  Com- 
mission has  applied  in  its  findings  of  final  value. 
The  above  requirements  can  only  be  accomplished 
by  making  the  report  of  the  Commission  correspond 
generally  in  form  to  the  report  of  the  Valuation 
Division  to  the  Commission,  as  hereinafter  referred 
to,  supplemented,  of  course,  by  the  Commission's 
findings  as  to  "final  value." 

The    Scope    of    the    Report    by    the    Valua- 
tion Division  to  the  Commission. 

This  report  should  contain  the  details  required 
in  the  paragraphs  from  "First"  to  "Fifth,"  inclu- 
sive; should  also  contain  a  summary  sheet  showing 

39 


■TT- 


the  three  cost  figures  classified  according  to  primary 
accounts  (so  far  as  these  are  followed)  of  the  entire 
railroad,  the  analysis  of  the  methods  of  valuation 
employed  and  of  the  three  figures  required  by  the 
Act,  and  the  reasons  for  their  diflference,  if  any. 

There  should  also  be  furnished  an  explanation 
in  detail  of  the  methods  used  in  obtaining  the  figures 
reported  under  the  several  accounts,  and  also 
sunmiary  and  assembling  sheets  for  each  account, 
which  should  be  sub-divided  by  location  in  such 
manner  as  will  enable  the  interested  parties  to  make 
an  accurate  check  of  the  same. 

Tracks  should  be  described  as  so  many  miles  of 
track  between  certain  points,  of  various  weights  of 
rail,  and  various  kinds  of  ballast,  and  other  track 
materials  which  may  be  covered  between  such 
points  by  one  description.  Graduation  and  tracks 
should  be  described,  as  nearly  as  practicable,  by 
miles,  or  by  some  other  proper  section. 

The  summary  and  assembling  sheets  should  show 
in  detail  all  principal  buildings  and  large  bridges. 
Culverts  and  small  buildings,  such  as  section  build- 
ings of  the  same  design,  track  signs,  and  other  items 
of  uniform  construction,  may  be  reported  as  so  many 
per  mile  or  other  proper  section. 

The  report  should  also  state  and  report  separately 
other  values  and  elements  of  value,  if  any,  together 
with  the  appropriate  analyses  required  by  this 
section  of  the  Act. 

Copies  of  all  notes  of  every  character  made  in  the 
field  should  be  furnished  the  carrier  when  taken 

40 


(i 


it 


and  the  conclusions  and  deductions  therefrom  when 
made.  When  not  so  furnished  the  carrier  should  be 
given  full  opportunity  to  copy  any  field  notes  desired. 

The  carrier  should  also  be  permitted  to  make 
copies  of  and  check  all  compilation  sheets  prepared 
by  the  government  for  preparing  the  assembling 
sheets  and  the  compilations  made  by  the  govern- 
ment accountants. 

It  is  suggested  that  only  by  the  adoption  of  the 
plan  outlined  can  there  be  secured  that  co-operation 
between  the  carriers  and  the  government  which  the 
Valuation  Act  requires,  and  which  is  so  essential  to 
the  eflScient  and  economic  performance  of  the  work 
of  valuation. 


41 


GAYLAMOUNT 
Pamphlet  binder 

Manufoctur«d  by 

GAYLORD  BROS.  Inc. 

Syrocu»«,  N.Y. 

Stockton,  Cflllf. 


APftl5lM4 


,-\ 


COLUMBIA  UNIVERSITY  LIBRARIES 

This  book  is  due  on  the  date  indicated  below,  or  at  the 
expiration  of  a  definite  period  after  the  date  of  borrowing,  as 
provided  by  the  library  rules  or  by  special  arrangement  with 
the  Librarian  in  charge.                                                                i 

DATK  ■ORROWCO 

OATC  DUE 

OATC  BORROWEO 

DATE  DUE 

f 

! 

i 

C28(3>Ba)100M 

0041407784 


D530.7 


Un3455 


D530.7 


Un3435 


U.S.  Interstate  Coimi»rce  Com- 
mission. 


^^^^^^  __^^  _  -^  ^  railroads 
in  the  United  States. 


OCT  2  1  «53 


wammmm 


wmmmmmmmm 


,:-* 


-1  ,«■  » 


ym 


i'^. ' 


A-<  ■<■ 


-!v 


ir-i 


:^-l 


?.;.-» 


t 


'0 


r-  -  *-:^'  :i>s-^^r#.-:.?-i^; 


I''- 


.;  .^* 


5*;. 


^        <  *t 


■A.  ^ 


r# 


m 


JV' 


»■*■    ^ 


r^ 


^'.f* 


•4 


\ 


^  •,       5%-' 


-»!-■* 


<  -'^  ri 


~-r  4. 


END  OF 
TITLE 


